Will the Grinch be back?

JulieRannazzisi

NEW YORK (CBS.MW) - Friday's festive mood on Wall Street helped investors forget - at least for a day - the horrendous showing in technology stocks earlier this week.

The Nasdaq staged a furious 7.6-percent rally Friday as oversold tech stocks finally found sponsorship. The index, however, continues to hover at 16-month lows and is down 5.1 percent on the week and off 38.1 percent on the year.

By contrast, the Dow Industrials rose 1.9 percent this week and is down 7.5 percent for the week.

"The outlook for 2001 is complicated. At some point, probably very soon, liquidity, as gauged by U.S. monetary policy, will ease. But the lag between when this happens and when individual investors embrace risk and again become aggressive buyers of equities will probably be measured in quarters, not weeks," said J.P. Morgan's Doug Cliggott in a note to clients.

"And there is still, at least in our eyes, a wide gulf between the likely earnings outcome in 2001 and current market expectations for next year. Our basic New Year's message is a simple, cautious 'be careful,'" Cliggott said.

Earnings and data watch

First Call said further deep cuts in first quarter and second quarter 2000 earnings estimates are likely -- at least in technology, consumer cyclicals, basic materials, and capital goods.

First Call said that based on the current consensus estimates for S&P 500 companies, earnings growth for the index is expected to be up 5.9 percent in the fourth quarter of 2000, 6.0 percent in the first-quarter 2001 and a 5.9 percent for the second quarter of 2001.

Next week's data docket will be dry. The scant releases on tap include: November existing home sales, December consumer confidence, November leading indicators, weekly initial claims and the December Chicago Purchasing Managers' index.

Friday's market action

Holiday cheer descended upon the market Friday, propelling the major averages. The Nasdaq was in a particularly festive mood as most of its bellwether tech issues checked in with mesmerizing gains.

"The institutional panic to take losses has ended. They sold their most liquid names to balance the profits they took early in the year. The earthquake appears to be over and we're left with the aftershocks," said Scott Bleier, chief investment strategist at Prime Charter.

Amid the unwinding of the bubble in tech sector that has taken place over the past nine months, the bifurcation between the Nasdaq and the broader market has corrected, Bleier said. "We've corrected the excesses."

Friday's rally lifted all boats within the tech arena right from the start of trading, although buyers were particularly aggressive in the Internet, computer hardware, software and chip segments. In the overall market, biotech, financial, cyclical and oil issues paced the advance with only gold and select drug and oil service issues meandering in the minus column.

Some of the Dow's biggest gains were in its tech components: IBM surged 9.1 percent following three straight days of losses; Hewlett-Packard 9.6 percent and Microsoft 6.9 percent. But old-economy stocks also saw their share of buying interest. In fact, Alcoa, jumped 9.6 percent and International Paper ended up 6.6 percent.

The Nasdaq Composite
$COMPQ
ended at its highs of the session, jumping 176.90 points, or 7.6 percent, to 2,517.02 while the Nasdaq 100 Index
$NDX
rallied 211.42 points, or 9.5 percent, to 2,436.26.

Two stocks not participating in the rally: JDS Uniphase fell 4.9 percent to $40.94 -- reaching a fresh 52-week low in intra-day trading - while Intel slipped 19 cents to $32.94. Wachovia Securities cut its rating on JDS to a "buy" from a "strong buy" while Banc of America Securities told clients Friday that it increasingly looks like Intel will fall short of its "flattish" revenue guidance for the fourth-quarter.

Volume was heavy at 1.09 billion on the NYSE and at 2.24 billion on the Nasdaq Stock Market. Market breadth was positive after recent, shabby showings, with winners outpacing losers by 20 to 9 on the NYSE and by 27 to 13 on the Nasdaq.

Separately, Trim Tabs said all equity funds had outflows of $5 billion over the five days ended Dec. 20 vs. inflows of $8.4 billion in the previous week. Equity funds investing primarily in U.S. stocks had outflows of $2.6 billion compared to inflows of $8.3 billion during the previous week.

Will rally last?

Gains in some blue-chip tech stocks were mesmerizing Friday. But investors have witnessed these "one-day wonders" numerous times over the past months, only to be consistently disappointed once sellers show up one or two days later. Sustainable rallies certainly haven't been the market's hallmark of late.

But with the usual infusion into mutual funds just around the corner, market participants hope that the "January effect" will give the bulls something to hang their hats on.

"I think we got a lot of selling out of the way with Wednesday's decline. The selling [in the aftermath of the Fed meeting] caught many off guard," remarked John Hughes, market analyst at Shields & Co.

There's a good chance that Friday's "Santa Claus" rally will continue into next week, according to Hughes.

For one, tech stocks are oversold. Secondly, the market is entering a week that has historically been an extremely favorable one for the market. Lastly, with many participants on vacation, a drift higher may represent the path of least resistance. Indeed, that old Wall Street adage -- "Never short a dull market"-- may ring true next week.

Still, Hughes said rallies should be defined as "relief" moves within a downtrend.

"You'll get intermittent rallies, but techs remain in a downtrend and the Dow is going sideways," Hughes said. Bounces in technology represent opportunities for traders, he noted, but aren't safe entry points from an investing standpoint.

Sector action

Hardware stocks were on fire, giving the Nasdaq stellar gains Friday. IBM
IBM, +0.21%
which struggled with losses for three sessions in a row following a downgrade from Merrill Lynch earlier this week, surged $7.44 to $89. And fellow Dow-component Hewlett-Packard
HWP
which also saw its rating slashed by Merrill, climbed $2.81 to $32.19. On Friday, Salomon Smith Barney told clients that talk of an earnings pre-announcement from IBM are "completely unfounded." Read Ratings Game.

Other gainers in the hardware group included Compaq, up 8.8 percent, Apple Computer, up 6.7 percent, and Dell Computer, up 6.9 percent. The broad-based buying took the Goldman Sachs Hardware Index
$GHA
up a smashing 13.2 percent.

Internet issues also got a big piece of the rally Friday, pushing the depressed Amex Internet Index
$IIX
up 12.3 percent following a 49 percent decline this year. Net bellwether Yahoo
YHOO, +0.69%
which has had to absorb a 28-percent decline in December alone amid worries of softer e-tail sales and an unfavorable advertising environment, saw its shares rally 15.4 percent to $29.56 Friday. Among its brethren, EBay rallied 23.1 percent, CMGI put on 15.8 percent and Inktomi tacked on 23.1 percent. Read Net Stocks.

Turning to the broad market, financial shares blossomed, led by brokerage issues. The Amex Securities Broker/Dealer Index
$XBD
advanced 3.0 percent while the Phlx/KBW Bank Index
$BKX
climbed 1.4 percent. Shares of Goldman Sachs paced the advance, rallying 5.3 percent to $98.81. In the online group, Ameritrade rose 7.1 percent and E-Trade gained 11.1 percent. One stock in the red was Merrill Lynch
MER, +0.80%
which fell 44 cents to $63.56. According to the Wall Street Journal, the firm is planning to cut jobs at its research department in the new year, with the expected layoffs blamed on the weak stock market. The article cited people familiar with the matter. See full story.

Specific movers

In merger news, Northrop Grumman
NOC, +0.33%
said late Thursday it would buy fellow defense specialist Litton Industries
LIT, -0.85%
for $5.1 billion in cash and debt. See story. Northrop shed $7.81, or 9.5 percent, to $74.13 while Litton surged 24.5 percent, or $15.31 to $77.94.

Ford shares fell $1.38 to $22.81. The company
F, +0.81%
said late Thursday that fourth-quarter earnings-per-share will be 10 cents below the First Call estimate of 74 cents due to parts shortages and poor weather in North America. Read full story. Fellow carmaker General Motors, which is also a Dow-component, fell 2.6 percent to $50.06.

3Com shares added 84 cents, or 11.7 percent, to $8.03. After the close Thursday, 3Com
COMS
registered a second-quarter loss of 15 cents a share vs. the First Call estimate of a loss of 20 cents a share. But the company said sales and earnings growth in its March quarter and beyond will be lower than expected, citing the slowdown in spending among its telecom customers. Read story.

Treasury focus

Government issues relinquished early losses and posted gains across the yield curve. The bond market observed an early 2 p.m. ET close ahead of the Christmas holiday.

Friday's economic docket saw the release of November personal income, which rose by an as-expected 0.4 percent, and personal consumption expenditures, which gained an as-expected 0.3 percent.

"The key to any economy is the growth of income. And in November, it was quite decent. People still have jobs and wages are still rising strongly, so the income is there. And when money is available, people will spend it," observed Joel Naroff, chief economist at Naroff Economic Advisors.

"Confidence is still relatively high and incomes are still rising and that tells me that we are in a slowdown and not headed into a recession," Naroff concluded.

Cornering the currency market, dollar/yen gained 0.6 percent to 112.85 while euro/dollar rallied for a fourth straight session, rising 0.7 percent to 0.9228 and touching an intra-day high of 0.9260 -- a level not witnessed since late July.

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